The rapidity of the increase in interest rates on US and German government bonds surprised the majority of bond managers who, in addition to having to seek returns in a context of historically low interest rates, must manage moderate volatility. Right now, I really don't want to be in their shoes.
Among the most interesting aspects, there is the fact that the increase in yields mainly concerned the government bond market and was accompanied by a appreciation of the euro against the dollar.
To frame the situation, consider first of all that, simplifying, the return on an investment in government bonds can be broken down into three risk factors:
- le real interest rate expectations (how will interest rates move in the future?);
- le inflation expectations;
- il premium upon expiry o term premium (investing longer term should be more profitable than investing short).
In a context where, both in Europe and in the United States, inflation and real interest rate expectations are almost identical to those at the start of the year, I have the perception that much of it is increased the risk of holding government bonds in a situation of growing uncertainty (See Greece, US rates, geopolitical tensions), expanded by low liquidity of the bond market.
After years in which the performance of government bonds has been more than satisfactory, let's analyze the increase inyields in the USA and Germany in greater detail, trying to understand if and where there is value.
The yield curves of the USA and Germany
Let's start by interest rate curve USA:
- today short-term yields are higher than a few years ago and compared to the post-stress period Tapering (when the then Fed governor Ben Bernanke announced the possible end of QE in the US), while longer-term yields remain lower;
- the segment with the most value remains the segment a short/medium term;
- for the time being, the Fed has managed to keep the longer-term part of the interest rate curve.
Let us now turn to the German government bond curve:
- i yields remain all in all low, despite the recent increase;
- short-term government bonds continue to have negative nominal yields and to remain out of reach of the ECB;
- under these conditions, there is little value on the entire German yield curve (except for the very long part (30 years).
What to do with your investments?
Under current market conditions, US and German government bonds can serve as safe haven assets. In summary, in both cases the inflation risk and the interest rate risk appear limited. As far as the Fed is concerned, in my opinion two additional considerations apply: first of all, I don't think a rate increase of 25 basis points (late 2015 or early 2016) the scenario on US bonds changes completely, then with the continuation of the risk Greece, the Fed will pay even more attention to its moves.
Therefore, between the two options, it seems more reasonable to us take the dollar risk, as there appears to be more value and, as a country, we believe is less sensitive to the potential post-contagion effectGrexit.
We have recently changed theasset allocation of Express wallets because, being cautious by nature, with the market tending to undervalue the contagion risk of Greece, we prefer to miss out on some performance points but limit losses in case the European myopia materializes with the exit of Greece from the euro. A reasoning from risk manager, not as a speculator.
